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What Will Happen When the Stock Market Tanks?

It is bound to happen sooner or later. Actually, some may say that it is kind of weird that it hasn’t already occurred. Knowing that a stock market correction will happen is one thing. Knowing when it will happen is a completely different thing. So, what will happen when the market tanks?

A Definition Is In Order

First things first. A stock market correction is when the market falls 10 percent from its 52-week high. There is a lot of reason to actually welcome this type of thing – kind of like a financial shack-it-out of sorts so that the market can then once again move forward. These corrections occur rather frequently. Historically, a correction occurs about once a year. However, prior to the correction in 2015, the market had gone three years since the last one.

What causes a stock market correction? With so much information available to the masses it’s tough to say these days. In today’s environment it seems as if the market is immune to a lot of this data. It could be a series of poor economic data, some political event, or something more serious like terrorism.

And just to clarify, the usual definition of a stock market “crash” is when the 10 percent price drop occurs in just one day. Crashes can lead to a bear market. That’s when the market falls another 10 percent, for a total decline of 20 percent or more. Those are way worse than your average once a year correction of 10%.

So What’s Going To Happen?

In a period of time where it seems like much of the talk in the financial news world revolves around which record the indexes have broken this time, what will happen when everyone gets a solid dose of the inevitable? What goes up must come down – or at least correct itself for a short period of time.

1. Relief

Believe it or not, I think a lot of people will be relieved. I’ve read on more than one financial blog about people who are nearing their retirement dates wishing the market would just correct itself already. Funny to think about it that way, but like many things, waiting is the hardest part. Let’s just get it over so we can move on already. I think a lot of this stems from living through the Dot Com bubble, post 9/11 market, and the 2008 Financial Crisis.

2. “I told you so”

The talk around the office of those people who have been sitting in either all cash positions or safer bond positions will finally get to stand up with their chest out and say, “I told you so.” Seemingly forgetting about the the fact they have missed out on some major profits in recent times.

3. Quick! Buy Gold and Silver

I’m not totally against the idea of owning commodities like gold and silver (although I currently don’t own any), but I find it really amusing that there are commercials for these types of products. The reason why these products have commercials are because they need to be sold. On the flip side, I haven’t seen a commercial for the S&P 500 index in recent times, or ever. And I’m not counting the generic Fidelity or Vanguard commercial. I would imagine that the next correction will immediately lead to an increase advertising of “buy gold.” It’ll be some older actor on a horse ranch talking about, “You know what makes me feel good? Having bars of gold.” I’m not even really kidding. Watch Fox News in the early evening hours and these are the types of commercials that are on.

4. A push to get you out of your passive index fund

This is really a play on fear – similar to the folks selling gold bars you can bury in your backyard. The “high fee” advisers in the industry will try and capitalize on the opportunity. People will be scared and when told, “If you had just been with me, you could have avoided this entire situation.” Sigh.

5. A rush to leave Stocks

Sadly, many people will sell at the bottom and “wait” for things to get better, essentially locking in the loss and then buying back in at a higher price. I know a few folks who sold at the bottom of 2008 and never bought back in. I’m not shy about saying that this is a huge mistake. Don’t do that.

6. There will be push back on the Fed

There will be news stories about how the Federal Reserve raised interest rates too fast causing turmoil in the market. I would be suspicious of any type of talk like this. There is good with rates moving up from zero.

7. Smart investors will stay the course

Those who have a plan, know the history, and are listening to the right people will keep focused on the plan. Really smart investors might even go so far as increasing their equity holdings. By doing this, they will be buying at a discounted price gaining them an extra “bump” when the recovery occurs. And it will occur.

8. There will be talk of “buy and hold is dead”

There will be many news stories about looking at your quarterly retirement account statement only to see the losses. “Are 401Ks really the safe place for retirement savings?” These types of headlines will occur on prominent news stations nationwide. Just remember, when you see this type of story, Warren Buffet is undoubtedly looking for discounts on companies he will invest billions in knowing that the price of the stock will go back up. Stay the course.

9. Warren Buffet will get richer…eventually.

Undoubtedly, this gentlemen will make a play to move his abundant cash stockpiles into action. He’ll be buying at a discount and looking like a genius after the recovery.

With that said, it’s hard to see your accounts go down. It’s not fun. Unless you are looking at your mortgage balance, it’s a lot cooler to see a bigger number on your balance sheet than a smaller one.

I’m also wondering if we have somehow crossed into a new era. An era where past cycles of “corrections” are going to change. Growth of technologies and rapid changes to how and where consumers buy things (amazon) could be game changers for the old school market cycles. One thing is for certain. There will be a time when the stock market goes back down. Expect it. Don’t panic when it does.